Look out below!
The Atlanta Fed, who were the only people to accurately predict Q1 GDP, have just put out a report showing Q2 GDP will be no improvement, coming in at 0.9%, which is 2.5% (73%) below the average consensus at 3.4%. That's a pretty big gap to fill by analysts, who usually re-issue their GDP forecasts after getting a look at Q1 earnings.
As you know, our Members didn't need to wait as we went to CASH!!! last month (see our Top Trade Review) in anticipation of the correction we got a little taste of yesterday. Thanks to that little correction, our bearish Short-Term Portfolio shot up to a 121.3% gain while our bullish Long-Term Portfolio also went up to a 50.7% gain – as we kept our materials stocks, which were the only stocks that were positive yesterday as oil tested $60 (and yes, we were long on that too, but now short /CL at $59.50).
All in all, we're at a new high in our paired portfolios and, if anything, I want to get more bearish as we could have done better on a big dip than we did yesterday. We'll review the portfolios today in our Live Member Chat Room and see if we can find a more aggressive hedge to carry us into next week.
Greece might be fixed over the weekend or China may announce more stimulus and, of course, some huge company could buy some other huge company to make an even huger company – those are the only reasons we are not MUCH more bearish on the markets because we sure don't see any upside earnings surprises or any gangbuster sales in ANY sector that's reported so far.
As I noted in Member Chat, there was a $121.9Bn increase in private inventories in Wednesday's GDP Report and that ADDED 2.8% to our GDP numbers, which were 0.2%. So without this massive build-up of unsold merchandise – our economy would have contracted by 2.6% in Q1. Growth in GDP is considered a positive because there is an underlying assumption that inventories wouldn't be rising unless retailers were confident they could sell to consumers.
Unfortunately, that logic comes from the early 1900s, when it took time to fill the shelves and the manufacturers didn't also own the retail operations. These days, when there are slowdowns in sales, the shipments keep coming in and then it's generally the retail operation's responsibility to blow out the excess merchandise and it takes a few months before decisions are made to cut back production.
So, while a huge gain in inventories is considered a plus in the GDP calculations – it should be more of a red flag to investors going forward.
Not only are inventories building at an alarming rate but so is margin debt. According to TD Ameritrade's Fred Tomczyk, "margin loans are at high levels" and "client cash is at low levels" – not a good combination in any kind of economy. Tomczyk acknowledged the potential pitfalls of these trends and what they may portend for stocks."I wouldn't be surprised if we have a correction here. We've had six [or] 6½ years of up markets here."
Again, I hate to be the "perma-bear" – I'm not a perma-bear but I am permanently interested in helping people preserve their assets so I'm NOT going to shut up about this. We are not shorting the market – that's too dangerous with all the Central Banksters lined up against it – what we are doing is keeping our CASH!!! on the sidelines at what seems to be to be a very dangerous inflection point where the Net Credit Balance has blown way past levels seen before our last two crashes:
What is going to happen when (and IF) the Fed(s) ever begin to pull back some of that excess liquidity? How long can the markets continue to pretend that there will never, ever, ever be an sort of negative consequences to doubling down on debt? As noted by David Stockman, this poor GDP performance wasn't a surprise (not to us, anyway) – it was the inevitable result of exploding money running into imploding growth.
Berkshire Hathaway reports after the Bell today and we'll get Buffett's letter to investors this weekend – I'm very anxious to get his take on the economy. Berkshire is a conglomerate of American Business, a collection of well-run companies so they give us a good indication of the real health of our economy and, of course, Buffett's report is usually spin-free, which makes it a valuable read.
Of course, at 84, Buffett's age is a factor and the line of succession issues at Berkshire are bound to come up again but thank goodness no one kicked him out five years ago, when he was 79 or they might have missed a 100% gain in the stock! Like the S&P, BRK.B is a bit too price for us at $141.21 – we were gung-ho buyers back at $85 but have long since lost interest over $120 – as has Buffett, because that's the line at which Berkshire is willing to buy back it's own stock – 15% below the current price!
Having our cash on the sidelines has allowed us to pick up a few bargains this week and it's certainly not like things aren't on sale like LNKD, TWTR, YELP, LL, CMG, WYNN… Plenty of opportunities to go shopping – AFTER things calm down. Meanwhile, we're certainly enjoying the show much as we're enjoying this Futures pop in the S&P (2,090 on /ES) and the Dow (17,900 on /YM) - because we're looking for an index to short this morning!
Have a great weekend,
- Phil
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